NEWS ANALYSIS: The accounting loss Microsoft chalked up in its second-quarter earnings report doesn’t reflect the software giant’s true financial strength. But taking the loss now puts the company on course for higher profits and in a stronger competitive position for future quarters.
Much has been made regarding Microsofts fourth quarter results
because on paper, the company reported a $492 million loss. But this is really a situation in which a loss isnt really a loss. Its just a convenient means of balancing the books.
If you take out a $6.2 billion non-cash goodwill impairment charge related to its ill-fated acquisition of aQuantive and deferred revenue from Windows upgrade offers. In effect, Microsoft chose this quarter to write off the aQuantive acquisition that actually happened in 2007.
Others have noted that Windows sales are off $600 million, including those deferred revenues, when compared to FY2011. According to a number of analysts, this sales slump is really in anticipation of the release of Windows 8 this coming October. For Microsoft, this is very good news.
So how can these losses be good news? If you take out the aQuantive loss and the deferred revenues, Microsoft would have reported a profit for the quarter. In other words, its a paper loss. Microsoft is still making plenty of money. The even more important factor is that people are waiting for Windows 8 and analysts are expecting a strong demand when the OS ships in October.
This is not particularly good news for Microsofts competitors. The company is essentially clearing its decks for action and is in a very strong position to use its strength when it releases Windows 8, the Surface tablet and Microsoft Office in October. And the company remains financially strong. Microsoft has just under $60 billion in the bank.
By having all that cash under its mattress, Microsoft can hang in there and spend money to make sure that Office, Windows 8 and the Surface tablet are given the time and resources to be successful. Unlike most companies with smaller resources that have to bail out of a product line if it isnt a near-term success, Microsoft is in its product business for the long term. Its prepared to continue supporting products for a very long timeperhaps yearsuntil they can dominate their respective markets.
This has happened before. Microsoft continued to pour money into the PlayStation, and continued to lose money on it, until the competition was eventually worn down through sheer persistence. The same thing happened with Microsoft Office, which spent the best part of its first 10 years in existence toppling competing office productivity suites. Office continues to dramatically outsell its competition, some of which is free, to the point that it completely dominates the office productivity market.
Now Microsoft has taken a very big step and its clearly planning to take the necessary action to support the Surface tablet and the Windows 8 operating system that defines its mobile strategy. Competitors can expect that Microsoft wont let price stand in the way of sales. Just as its offering upgrades to Windows for $40, it can afford to sell upgrades to Office at prices that will cause market share to explode.